Tesla Motors Announces Offerings of Common Stock and Convertible Senior Notes

[Johan]

Can anyone explain the mechanism of the hedge to offset stock dilution?

I'm wondering about this too. The way I'm reading it, with my crude understanding, is that they are pushing the problem of dilution in front of them for a few years(?): until the convertible notes become "eligable for conversion" (I don't know the correct term). That one way to lock at this convertible debt is that it's kind of like call options? Or maybe I'm completely off here?

 

[luvb2b]

I'm wondering about this too. The way I'm reading it, with my crude understanding, is that they are pushing the problem of dilution in front of them for a few years(?): until the convertible notes become "eligable for conversion" (I don't know the correct term). That one way to lock at this convertible debt is that it's kind of like call options? Or maybe I'm completely off here?

someone explained this very well on the dear elon thread.

The transaction is set up this way so that the first two legs can be integrated (debt issuance plus purchased call) for tax purposes, creating tax-deductable OID interest. The third leg (selling a warrant), will have a higher strike, and longer maturity, and will be far enough away from the debt/purchased call strikes that the three legs will each pass muster as separate legitimate economic transactions for tax purposes. The net impact is the ability to issue convertible debt with a strike price very far out of the money (100% above the current price, apparently, in this transaction), much further out of the money than would usually be tolerated in the plain-vanilla convert market.

 

[FVO]

Can someone explain what this means in layman's terms? I read the release and it's like it was in another language. It's not just another stock offering, it's different somehow?

I'm to having difficulty in understanding what this transaction really is. How can it be that there will be sold more shares on the free market and don't create a lower price for the existing shareholders?

 

[avatar]

I'm to having difficulty in understanding what this transaction really is. How can it be that there will be sold more shares on the free market and don't create a lower price for the existing shareholders?

No one predict with certainty what the share price will do. The reason there isn't any dilution is because Elon has used covered calls as an instruments to raise cash now. There will dilution when the call holders begin to exercise but that will several years out. The key take away is that he has removed a current liability from the books and deferred that liability to a future date when Tesla will be bigger and more capable of taking on such a liability. It has the added benefit of giving tesla a big cash infusion for current investments. Hence the stock market reacts positively.

 

[132]

IMHO

If the timing and structure of this offering reenforces a higher support level, it is going to be immortalized in textbooks. A short squeeze with very brief minimal pull back.

Glad I still have a position, increasingly doubtful I'll be able to reinvest my gains after a drop into the 60's or lower.

 

[NigelM]

I'm to having difficulty in understanding what this transaction really is. How can it be that there will be sold more shares on the free market and don't create a lower price for the existing shareholders?

Basic supply and demand. If demand exceeds supply then the share price will rise.

 

[gregincal]

I'm to having difficulty in understanding what this transaction really is. How can it be that there will be sold more shares on the free market and don't create a lower price for the existing shareholders?

Theoretically with any secondary offering you will own a slightly smaller share of a more valuable company (since the company is getting an infusion of cash it should by definition become more valuable). The company should only do it if the increase in future value is greater than the dilution of stock. In this case people obviously feel it is, since the stock is going up.

 

[Cosmacelf]

A friend of mine who is a lot more knowledgeable than me breaks down the announcement like this:

"1. Tesla is issuing convertible debt which can be converted into common stock at a TBD price.

2. To prevent that dilution upon conversion of the debt, Tesla is entering into a hedge transaction (utilizing options and warrants most likely done by Goldman). These will be what is called European style settlement meaning they are not using listed options but structures specifically designed for the company and lasting until the obligation on the convertible is eliminated. Effectively, this will give the company the ability to pull shares from the open market at a specified price and turn around and give those shares to the convertible holders as they exercise (preventing the issuing of new shares and diluting).

3. To prevent the counterparty (Goldman) from having a capital exposure being the other side of Tesla’s hedge, counterparty (Goldman) will create a series of transactions to prevent their capital from being exposed – So they will most likely buy the shares they could be obligated to deliver and then collar it (buy puts and sell calls) so that their capital is secured within a certain margin."

 

[Norbert]

A friend of mine who is a lot more knowledgeable than me breaks down the announcement like this:

"1. Tesla is issuing convertible debt which can be converted into common stock at a TBD price.

2. To prevent that dilution upon conversion of the debt, Tesla is entering into a hedge transaction (utilizing options and warrants most likely done by Goldman). These will be what is called European style settlement meaning they are not using listed options but structures specifically designed for the company and lasting until the obligation on the convertible is eliminated. Effectively, this will give the company the ability to pull shares from the open market at a specified price and turn around and give those shares to the convertible holders as they exercise (preventing the issuing of new shares and diluting).

3. To prevent the counterparty (Goldman) from having a capital exposure being the other side of Tesla’s hedge, counterparty (Goldman) will create a series of transactions to prevent their capital from being exposed – So they will most likely buy the shares they could be obligated to deliver and then collar it (buy puts and sell calls) so that their capital is secured within a certain margin."

That's the kind of explanation I was looking for, especially (2). However, I don't quite understand (3). Does (1) mean that convertible notes are like call options which can be exercised only after a certain date? And it seems Tesla also issues 2+ million shares immediately, or is that somehow part of the above?

 

[Causalien]

IMHO If the timing and structure of this offering reenforces a higher support level, it is going to be immortalized in textbooks. A short squeeze with very brief minimal pull back. Glad I still have a position, increasingly doubtful I'll be able to reinvest my gains after a drop into the 60's or lower.

They've done this in the past two offerings so it is already immortalized in my textbook. Elon is mindful of the effect of dilution (He is also a majority holder so his interest with current shareholders are aligned) and you can always see touches here and there making sure stocks will not drop. I am not surprised since a degree in physics probably means he is capable of figuring out the mathematical models of the options he decides to take. It took me 5 years of practical trading to figure these things out, pretty sure TSLA's been operating more than 5 years and I am sure Elon is a lot smarter than me.

 

[brianstorms]

Did Tesla just increase the size of this deal?

http://www.reuters.com/article/2013/05/16/idUSL2N0DX1SY20130516

 

[Cosmacelf]

Yes.

 

[deonb]

Yes.

Cool by me. But can we get $50 million worth of superchargers please?

 

[Cosmacelf]

Per Elon, that announcement is now next week

BTW, notice how fast this deal was put together. Elon was fully expecting to announce superchargers this week, but late last week tweeted that that announcement was going to be pushed back a week for something else. This means the board had the foresight to have a shelf registration ready to go should the stock price rise. This indicates the board is really on the ball. Also, they made the decision to go forward with this financing within a matter of days. No agonizing over decisions for months at Tesla. Boom, its done. Very agile company here.

 

[twinklejet]

Per Elon, that announcement is now next week

BTW, notice how fast this deal was put together. Elon was fully expecting to announce superchargers this week, but late last week tweeted that that announcement was going to be pushed back a week for something else. This means the board had the foresight to have a shelf registration ready to go should the stock price rise. This indicates the board is really on the ball. Also, they made the decision to go forward with this financing within a matter of days. No agonizing over decisions for months at Tesla. Boom, its done. Very agile company here.

That's possible because there is no separation between "shareholder - board of directors - executive". The most prominent shareholder is Elon himself. The chairman of the board is Elon himself. The CEO is Elon himself. (Plus props to being co-founder too)

 

[joefee]

The other interesting thing that this will do is remove the loan payments from the bottom line in future quarters, which could potentially increase profitability substantially.

Yes.. Very good for the P&L and extra cash for moving up model X & Gen 3 rollouts!!!

 

[kenliles]

Per Elon, that announcement is now next week

BTW, notice how fast this deal was put together. Elon was fully expecting to announce superchargers this week, but late last week tweeted that that announcement was going to be pushed back a week for something else. This means the board had the foresight to have a shelf registration ready to go should the stock price rise. This indicates the board is really on the ball. Also, they made the decision to go forward with this financing within a matter of days. No agonizing over decisions for months at Tesla. Boom, its done. Very agile company here.

you might be right, but I think this points to a well thought out plan that had this already in place months ago when the shorts took control of the share price. I think only the trigger pull was reactive to events, not the plan itself;

 

[twinklejet]

Tesla's offering of 2.7 million shares priced at $92.24 a share (Wall Street Journal)

Source: http://blogs.wsj.com/moneybeat/2013/05/16/teslas-see-strong-demand-for-offering/

Article:

Tesla Sees Strong Demand for Offering

Tesla Motors Inc. TSLA +8.73% priced a block of its shares at virtually no discount to its latest close, a sign of strong demand for the electric car maker’s shares even after a steep run-up in price.

The deal was seen as the latest test of investors’ enthusiasm for the electric car maker. It gave money managers a chance to grab big blocks of Tesla’s stock after a more-than-50% rally in the company’s stock price in little over a week.

The company’s offering of 2.7 million shares priced at $92.24 a share, a person familiar with the matter said late Thursday. The price represents a less-than-0.1% discount to Tesla’s closing price Thursday, and an 8.7% premium
to the stock’s close Wednesday, just before the deal was announced.

The pricing indicates demand for the offering was particularly strong. Big stock sales typically price at a discount to where the shares traded before the announcement. That helps compensate buyers for the risk that the stock will fall after their purchase, and eases concerns about newly minted shares diluting their ownership.

Tesla is also selling $525 million worth of convertible notes with a coupon expected to range between 1.5% to 2%, according to people familiar with that offering. Final pricing on the deal couldn’t immediately be learned late
Thursday.

The company is raising funds to prepay a $465 million Department of Energy loan it used to finance development of its Model S car. It also plans to use funds for general corporate purposes and to enter into derivative agreements
that would limit the convertible-note sale’s potentially dilutive impact on shareholders.

Tesla said Chairman and Chief Executive Elon Musk planned to buy about $45 million worth of stock in the offering and another $55 million of Tesla’s shares in a separate deal.

Selling the securities after the rally in Tesla’s market value was a shrewd move by its management team, said Charlie Wilson, an associate portfolio manager at Thornburg Investment Management, which owns Tesla shares.

“It’s very smart–they’re capitalizing on the strong momentum in their share price to take out their DOE loan,” he said.

Wilson said Tesla has “one of the best outlooks for growth of any company I follow” but that he didn’t plan to buy stock in the offering, after the shares’ recent run.

Goldman Sachs Group Inc. GS -0.73% led the stock sale. It’s also leading the convertible bond offering, with Morgan Stanley MS -1.13% and J.P. Morgan Chase JPM -0.23% & Co.

Read original article at http://blogs.wsj.com/moneybeat/2013/05/16/teslas-see-strong-demand-for-offering/

 

[Cattledog]

Good news that fund managers and investment management companies want in at $92.

 

[Raffy.Roma]

I thought that the issue of new stock would have made lower the stock price. If on the contrary the stock price doesn't lower it means that the stock value is very good and that maybe after the stock issue the stock price could also increase?